57. Lufthansa acknowledged the inherent
logic of the proposal but thought that the Commission's powers
should only be extended to air services to and from third countries
that had implemented a liberal aviation policy with a majority
of, but preferably all, Member States and who were willing to
negotiate a single bilateral agreement with the EU. This would
mirror the approach previously adopted by the Commission when
it had sought to liberalise the intra-European market (Q 152).

58. British Airways opposed the proposals.
They argued that they were not just concerned with the application
of the competition rules but that their influence would be extended
"to the whole question of aviation relations between European
countries and the rest of the world and the respective responsibilities
of national governments and the Commission". In their view,
"to apply the Commission's competition powers directly to
airlines whose activities are governed by air services agreements
could create serious conflicts". Such a conflict would arise
if a collaborative arrangement between two designated carriers
established under the terms of an existing bilateral agreement
was subsequently found to conflict with EC Competition Rules (Q
221).

59. Ms Jackson also made the point
that the United Kingdom Government had a very good prospect in
the near future of completing a liberal Air Services Agreement
with the United States. If the proposals were accepted "everything
would come to a halt and one could conceive of a very long period
of time indeed before any such agreement could be reached"
(Q 379). In contrast, Virgin Atlantic considered that the benefits
of ensuring a strongly competitive marketplace outweighed any
additional inconvenience for air services negotiators (pp 53-4).

60. Whilst the competition provisions
of the EC Treaty in principle apply to Member States with regard
to bilateral air services agreements with third countries, the
Government argued that the Commission does not have the power
to intervene directly in such negotiations in order to enforce
compliance by Member States and the Community's external competence
did not extend this far (p 90)[21].
Ms Jackson was concerned that the proposals "would enable
the Commission to participate in bilateral negotiations with third
parties on air services agreements by the back door". As
the Council of Ministers had consistently refused to grant a mandate
for the Commission to negotiate such agreements with third countries,
by approving the proposal the Government would be "ceding
powers for which the Commission has not managed to obtain any
kind of political mandate from the Council [of Ministers]"
(Q 361). This view was echoed by Lufthansa.

61. Several witnesses were concerned
that the Commission was attempting to push its own political agenda.
British Airways thought that all questions involving competition
and resource allocation ultimately were political and involved
a public interest judgement (Q 229). Lufthansa argued that DG
IV's investigations of the various transatlantic alliances (under
Article 89) were a lever being used by the Commission to "obtain
additional political authority". Applying the same methodology
to each alliance irrespective of market size and structure was
evidence of a politically driven approach. In order to prevent
competition policy being used as a political tool Lufthansa favoured
"an independent enforcement authority" along the lines
of the German Bundeskartellamt, the German competition authority
(Q 152).

70. British Airways argued that as
the "UK has a thriving and competitive air transport industry
... second in size only to that of the United States" it
"has the most to lose by getting this issue wrong".
The proposals, of themselves, would produce no winners except
possibly the legal profession because of the confusion that would
result (QQ 221, 231). Several witnesses thought that in the event
of a bilateral agreement between the EU and the United States
"the losers might well be British carriers, because ¼
the market between the UK and the United States is so much larger
than the markets from continental countries" (QQ 3, 102,
232). The AUC however thought that any short-term loss to the
UK would be outweighed "by the potential long-term benefits
of global liberalisation" which could only be achieved by
negotiations at a supranational level (Q 102).

71. The view that the UK civil aviation
industry was widely acknowledged as being the most competitive
in Europe received support. British Midland argued that UK air
fares "at their current levels are without doubt at the most
outstanding value for money for any retail product that you can
buy" and the level of competition for leisure travellers
was exceptional. By contrast, many domestic air fares in the United
States which had been low in comparison to fares charged for journeys
of equivalent distances in Europe were now often considerably
higher as a result of the demise of many low cost operators (QQ
12, 13, 18).

72. The CAA pointed out that during
the five years of liberalisation in the European airline market
there had been a steady growth in smaller and medium-sized carriers,
with a resultant fall in the market share of national carriers.
On those routes where significant new entry had occurred air fares
had fallen, often dramatically. This was not the case on routes
on which national carriers had retained their dominance (p 5).

73. While discounted economy fares
have generally fallen in real terms across the European Union
since deregulation, the same is not true of first class and business
class fares, particularly on flights out of the United Kingdom.
In the last two years, United Kingdom first class and business
class fares rose by around 20 per cent[24].
British Airways stated that first and business class fares were
higher between the United Kingdom and the United States than they
were between the continent and the United States because of the
laws of demand and supply. "Demand for those fares is much
higher in the United Kingdom proportionately than it is on the
continent" (Q 229). The British Airline Pilots' Association
(BALPA) pointed out that in the past the CAA had had some success
in dealing with the problem of high business fares through the
selective freezing of tariffs (p 1).

74. The AUC also believed that European
consumers were likely to gain more benefit from European Communities
negotiations with third countries than from a continuation of
the existing bilateral approach. This was for two reasons: first
because Community negotiators "wielding the negotiating power
of 15 Member States . . . should be able to win much greater liberalisation
than individual Member States could obtain themselves" (a
view shared by Lufthansa); and secondly because Member States
would be likely to place greater weight on national economic interests
than on those of consumers. The AUC did acknowledge that this
would not necessarily result in any net gain for consumers in
the United Kingdom as any benefits won by the Commission would
be shared among the Member States (QQ 104-6).